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Business owners who want to raise money without taking on debt can sell an unlimited number of common and preferred stock shares. Issuing preferred stock gives you one major advantage over a common stock issue. Since preferred shareholders do not have voting rights, your ownership percentage remains unchanged no matter how many preferred shares are sold. The down side is that preferred stock gives your shareholders specific legal rights. Depending on the type of preferred stock, you may be able to defer those rights temporarily or indefinitely.

Cumulative Dividends

While you can defer paying your shareholders’ cumulative preferred dividends, you cannot eliminate your shareholders’ right to receive payment. You must pay the missed dividends before paying the next scheduled dividend payment and before paying common stock dividends. In addition, you must either show the deferred dividends on the balance sheet in the current liabilities section or disclose the deferred dividend information in the footnotes. The deferred dividends remain a balance sheet fixture until shareholders receive their payment.

Convertible Shares

Issuing convertible preferred stock gives shareholders the right to convert their preferred shares into common shares. You can defer this right by tying the conversion to a corporate event instead of making it date sensitive. The corporate event could be meeting a financial goal such as having annual net income of $10 million or when the common stock price reaches a predetermined value. Once the corporate event occurs, shareholders can convert their preferred shares to common shares. However, the convertible right remains deferred indefinitely until the event occurs.

Perpetual Preferred Stock

You can defer paying back a shareholder’s principal by issuing perpetual preferred stock. While other types of preferred stock have maturity dates, perpetual preferred stock has no ending date. There is no repayment deadline mandating you return the shareholder’s initial principal investment. In effect, the shareholder can only get the principal back by selling the shares to another investor. However, this also means that perpetual preferred shareholders receive their fixed dividend payments indefinitely.

Adjustable Rate Preferred Stock

Issuing adjustable rate preferred stock defers paying a high fixed interest rate by using a floating interest rate. The interest rate is tied to a financial benchmark such as U.S. Treasury bills. Reset the preferred stock interest rate using a preset formula every three months before making the quarterly dividend payment. If the benchmark rate drops, the dividend interest rate is adjusted downward. Should the interest rate move up, you can defer paying larger dividends by capping the stock’s maximum interest rate.

About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.